Difficult task ahead for the G20

John Lipsky

The challenging agenda for the G20 leaders at their next summit in Seoul includes multilateral policy coordination for the repair of damaged financial systems, as well as fiscal consolidation that does not choke off recovery and a rebalancing of demand in economies with excessive external surpluses.

In the wake of the 2008 global financial crisis, the G20 assumed a leadership role in addressing international financial and economic issues. This newly-empowered group helped give political backing to global efforts, many of them centred on the International Monetary Fund (IMF), to arrest the crisis, to secure a durable recovery and, subsequently, to deliver strong, sustainable and balanced growth.

We can look back over this short period to some significant accomplishments made possible through the cooperation of G20 members – working together and with key multilateral institutions such as the IMF. Examples include the massive and coordinated fiscal stimulus in 2009, the tripling of IMF resources – including new support for the poorest countries – and the strengthening of the global financial safety net through such innovations as the IMF’s Flexible Credit Line.

These results demonstrated in high relief the potential gains from strong international collaboration. Of course, some wondered whether G20 members’ newfound willingness to work together – which was so effective during the crisis – would fade away as the recovery arrived and challenges became more complex. The early evidence is that the cooperative spirit has endured. Cooperation requires persistence and commitment. In several areas, the seeds have been sown for ongoing dialogue and cooperation, even if countries’ diverse circumstances call for distinct policies in response.

With the accomplishments of the G20’s London and Pittsburgh summits behind us, and with the Toronto summit effectively looking to Seoul for results across many fronts, the focus is turning to South Korea – not just for concrete decisions, but also to demonstrate that the spirit of effective collaboration endures. Thus, both expectations and risks are high, but so too is the potential for success, and for a lasting legacy to be created.

Since becoming G20 Chair, Korea has taken its responsibilities forward with impressive ambition and professionalism, evidencing a strong commitment to multilateralism and to the Asian region. Already, these efforts are beginning to pay off. The G20 has added political momentum to those reform efforts that are currently underway in the IMF and elsewhere. Many complex issues have moved forward, including: coordinating exit policies; strengthening the global financial safety net; implementing the framework for strong, sustainable and balanced growth; and reforming IMF governance. These and other issues are on the G20 agenda, and they also will be a key focus for the IMF. The outlook for the global economy presents various challenges for policy-makers and will therefore affect the G20 policy agenda. Despite recent signs of slowing momentum, the global recovery is expected to continue. Nevertheless, the most likely prospect is for a moderate, multi-speed recovery, with significant downside risks. While financial markets have improved somewhat, ongoing financial market strains have heightened uncertainty. Against this backdrop, the overarching policy challenge is to sustain the recovery while restoring confidence. Several key policy challenges are evident, some more immediate than others. They include:

The need for an ambitious and vigorous programme of financial system repair and reform. In many advanced economies, progress is underway on bank recapitalisation; on bank consolidation, resolution and restructuring; and on regulatory reform. Greater transparency regarding bank liabilities and their exposures to sovereign debt, is a key goal. The recently completed European bank stress tests are receiving particular focus at present, and in general they have made a positive contribution to market sentiment. There is also a pressing need to reduce uncertainty about the broader regulatory environment.

The need for credible, medium-term fiscal consolidation plans to bolster confidence, while not choking off the recovery. G20 members have agreed to follow credible and ‘growth-friendly’ mediumterm fiscal adjustment plans that could include legislation creating multi-year targets. Some of the critical tasks are reforms to pension entitlements and public health care systems, controlling nonentitlement spending, and strengthening fiscal institutions. Better strategies for public debt management also will be helpful. While most G20 economies’ current fiscal plans appear to be appropriate, countries facing sovereign funding pressures still will require upfront measures to underpin confidence.

The need for global demand rebalancing and key structural reforms to support future growth. In economies with excessive external surpluses, the transition toward domestic sources of demand should continue, helped by structural policies to reform social safety nets and improve productivity in the service sector as well as – in a variety of cases – more flexible exchange rates. In economies with excessive external deficits, fiscal consolidation and financial sector reform should help rebalance demand. But successful fiscal adjustment is difficult without strong growth. Structural reforms, particularly in product and labour markets, are needed to raise potential growth.

Front and centre in the G20’s economic policy agenda is the framework for strong, sustainable and balanced growth. Launched in Pittsburgh, the framework offers the potential for precisely the kind of policy collaboration and cooperation that was central to the G20’s success last year during the depths of the crisis.

So far, the signs are encouraging. The first stage of the process included constructive engagement from all parties. It was agreed in Toronto that countries will formulate country-level plans to achieve an ‘upside scenario’ for the global economy. Nevertheless, the second stage of the process will be very challenging. As G20 Chair, Korea has to shepherd this process to Seoul, to deliver the Comprehensive Action Plan envisaged by the leaders in Toronto. Given the inevitable difficulty of multilateral policy coordination, this is a demanding task.

In addition to addressing the underlying economic challenges, three more ‘architectural’ issues also are high on the agenda. First, the international financial system needs to be made more robust. Hence, as noted above, there is a need to accelerate the process of strengthening both regulatory and supervisory elements. Korea is working with officials in key financial centres, the Financial Stability Board, the IMF and other stakeholders to reach agreement on this agenda.

Second, the resilience of the international system needs to be improved. A strengthened global financial safety net is an important potential building block. Korea has been working extremely actively within Asia, and with other G20 capitals – as well as with the Fund – to garner the necessary support of the international community. Finally, governance reform at the IMF is another challenge. With an objective set in Pittsburgh, all eyes are turning to Seoul for delivery. But quota reform is only one aspect of the task. A broader reform package is needed to adequately reflect new economic realities. Korea has an important role to play, working with key actors, particularly emerging markets. This will not be easy, but reaching an agreement would be a huge accomplishment.

In conclusion, the G20 agenda in the run-up to the Seoul summit is complex. This reflects both the wide-ranging and deep-rooted nature of the challenges, and the window for meaningful and lasting reform that the crisis has created. I am confident that the Seoul summit will be able to make significant progress in all these areas, showcasing how the international community in general, and the G20 specifically, can work together to make the world a more stable, secure and prosperous place for all.

About the author:

John Lipsky is First Deputy Managing Director of the International Monetary Fund


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